With strong results in 3Q20 and an upbeat outlook, management has raised its guidance for 2020. We expect CRL to be active in M&A in 2021 as it expands its ability to serve customers in early stage drug development. CRL is well positioned in the areas of manufacturing support and cell and gene therapy. After a sharp decline in March, the stock has rebounded and is now up 63% year-to-date.
Charles River saw business recover in 3Q20 as coronavirus headwinds subsided. Notably, organic revenue rose 7.8%, up from 1.4% growth in 2Q20. The strong performance led management to raise its 2020 guidance.
The company reported 3Q20 results on October 29. Adjusted EPS rose 37.9% to $2.33, above the consensus by $0.53.
The company saw a sharp drop in its RMS business in 2Q20, as academic research centers shut down due to the pandemic. However, as research customers began to reopen labs in June, they resumed purchases of RMS products. This recovery continued into 3Q20. Segment revenue grew 14.6%. The HemaCare and Cellero acquisitions contributed 11.1% to 3Q20 RMS revenue. Organic revenue grew 2.0% from the prior year following a decline of 18.4% in 2Q20. While this segment saw strong demand for research models in China, demand outside China also showed sequential improvement as clients gradually resumed normal research activities. Sales were particularly robust in the Genetically Engineered Models and Services business.
The DSA segment also showed sequential improvement in 3Q, though the growth was more modest than in RMS. Segment revenue rose 9.8%, while organic revenue grew 8.6%, improving sequentially from 6.2% growth in 2Q20.
The Manufacturing Support segment saw revenue grow 12.9% as reported and 11.5% on an organic basis in 3Q20, up from 8.0% growth in 2Q20. The improvement reflected stronger demand in the Microbial Solutions business and an increase in instrument placements that had been deferred from 2Q due to the pandemic.
All three segments posted higher operating margins. The adjusted companywide operating margin was 22.7%, up 330 basis points, as the higher revenue generated leverage through the income statement. Margin growth was also driven by efficiency initiatives and cost controls related to the pandemic.
Over the past two years, CRL has acquired a number of businesses that have expanded its capabilities and should help to drive future growth. Notable acquisitions include Cellero (completed in August 2020), Hemacare (January 2020), and Citoxlabs (April 2019). We expect CRL to continue to be active in M&A.
EARNINGS & GROWTH ANALYSIS
As noted earlier, the company has raised its 2020 guidance. It now expects adjusted EPS of $7.75-$7.85, up from a prior view of $7.05-$7.35. In addition, CRL looks for free cash flow from operations of $415 million, up from $350-$365 million.
Based on the strong 3Q performance and upbeat outlook, we are raising our adjusted EPS estimates to $7.89 from $7.15 for 2020 and to $9.00 from $8.25 for 2021.
FINANCIAL STRENGTH & DIVIDEND
The company has generated higher profit margins and stronger cash flows in 2020. It generated $408.2 million in cash flow from operations in the first nine months of 2020, up from $300.3 million a year earlier. CRL does not pay a dividend.
MANAGEMENT & RISKS
CRL also faces indirect risk from government funding, as certain customers depend on funding from agencies such as the NIH.
CRL trades at 27.5-times our 2021 EPS estimate, above the average multiple of 23.0 for our life sciences coverage universe. We believe the stock merits a premium valuation based on the company’s strong growth prospects, including new growth drivers from M&A. These acquisitions are expanding the company’s ability to support early stage drug development at pharmaceutical and biotech companies. After a sharp decline in March, the stock has rebounded and is now up 63% year-to-date.
On December 21, BUY-rated CRL closed at $250.72, up $1.75